SCO goes belly-up

Years after it was first predicted, The SCO Group, a Unix and mobile software distributor better known for its Linux litigation, has filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code.

SCO’s Board of Directors unanimously decided that Chapter 11 reorganization is in the best long-term interest of SCO and its subsidiaries, as well as its customers, shareholders and employees. At the same time, SCO’s subsidiary, SCO Operations, has also filed a petition for reorganization.

In the U.S. court system, a case filed under Chapter 11 of the United States Bankruptcy Code is often called a “reorganization” bankruptcy. In the case of a corporation going Chapter 11, its funds exist separately and apart from its owners, the stockholders. Therefore, a Chapter 11 doesn’t put the personal assets of the stockholders at risk aside from the value of their investment in the company’s stock.

When SCO filed for Chapter 11 it was also given an automatic stay of time during which all judgments, collection activities, foreclosures and repossessions of property are suspended and may not be pursued by the creditors on any debt or claim that arose before the bankruptcy petition filing.

During this period, a business may file a plan of reorganization during the first 120-day period after the petition is filed. The court can also give SCO an extension of up to 18 months after the petition date to come up with an acceptable reorganization plan that will enable it to meet its debts. On top of that, SCO has 180 days to obtain acceptances of its plan.

Like most Chapter 11 companies, SCO intends to maintain all normal business operations throughout the bankruptcy proceedings. Subject to court approval, SCO and its subsidiaries will use the cash flow from their consolidated operations to meet their capital needs during the reorganization process.

“We want to assure our customers and partners that they can continue to rely on SCO products, support and services for their business critical operations,” Darl McBride, president and CEO of SCO, based in Lindon, Utah, said in a statement. “Chapter 11 reorganization provides the company with an opportunity to protect its assets during this time while focusing on building our future plans.”

SCO gave no reason for this decision. However, in recent months, the company had been slammed in the courts. First, the U.S. District Court ruled that Novell, not SCO, owned Unix’s intellectual property. This knocked out the key props to many of SCO’s other lawsuits.

This decision also makes it likely that SCO owes at least some of the 26.5 million dollars it received from Sun and Microsoft in 2003. These funds had been used, in turn, to fuel SCO’s anti-Linux litigation.

On Sept. 17, the remaining issues in SCO vs. Novell were to be heard by the judge. All these issues touched upon how much money SCO would owe Novell from its Microsoft, Sun and any additional SCO-source license deals.

Now, however, as Bruce Lowry, director of global public relations for Novell, based in Waltham, Mass., noted, “Under U.S. bankruptcy law, any pending litigation against a company that files bankruptcy is stayed. So the trial that was to start on Monday is on hold. We’ll be assessing our options for pursuing our interests relative to SCO. That’s all we can say at this stage.”

Since Judge Dale Kimball has already shown himself to be persuaded by Novell’s arguments, it seems likely SCO decided to protect its remaining assets before he could render a decision on just how much money SCO owed Novell. In its most recent public quarterly filing, April 30, SCO only had total assets of $19.8 million.

Last, but not least, SCO’s earnings have continued their decline. In addition, the company’s stock sank below a dollar per share after the first Novell decision. After today’s bankruptcy filing, SCO’s shares sank still further — by 28 cents or 43 percent per share — to fall to 37 cents per share at the end of the market day.

SCO also filed a series of first-day motions in the Bankruptcy Court to ensure that it will be able to keep maintaining and honoring all of its commitments to its customers. These motions are designed to keep SCO in business until a decision is rendered on its bankruptcy.